If you’re fortunate enough to own a home, you know how fundamental it becomes to your life. It’s where your family sleeps, eats, plays, and makes memories together. Home is where the heart is, and years from now, your home will be in the background of all your memories.
However, a home is also a crucial financial asset that you can lean on when you need some assistance. Let’s check out how a home equity loan and HELOC can give you a life raft when you really need one.
HELOC, which stands for Home Equity Line of Credit, is a popular way for homeowners to tap into the equity they’ve built up over the years. A HELOC is a revolving type of secured loan in which a lender agrees to lend a maximum amount to the borrower over a certain period.
Here’s how it works. First, an independent assessor will determine your home’s current value. Then, you subtract from that number what you’ve paid in mortgage payments to date, and you can borrow against the difference.
The longer you’ve owned your home and the more of it you’ve paid for, the more money you can access. HELOCs tend to get approved quickly, and the interest rate is far lower than what you’d pay on a credit card because you’re using your home as collateral.
Legally, you can use the funds you borrow however you please. However, it’s wise to use the money to invest in your property since this raises your collateral’s value.
Put another way, if you tap into your home’s equity to go on a luxury vacation, you’ll have a great time! But you’ll have to pay to borrow money and pay for the vacation. In contrast, if you invest a HELOC back in your home and its value increases by more than the interest payments, you’ll make a net profit, meaning you can essentially get paid to borrow money and renovate your home.
Home Equity Loan
A home equity loan is like a HELOC, except instead of getting access to a revolving sum of money, the borrower receives one lump sum payment in their account. A home equity loan can be perfect for times when you know precisely how much money you need to borrow.
For example, if a home renovation is finished and you need a cash injection when it’s time to pay the final bill, you’ll know the total amount. You may prefer a HELOC at the beginning when the expenses you’re about to undergo are still open-ended.
Just make sure you can make all your repayments, as the failure to do so can be steep. If you’re not careful, you could potentially lose your home. Always use these borrowing mechanisms cautiously and deliberately.
Prices are rising for everybody at the grocery store and elsewhere. Between the Bank of Canada making borrowing more expensive and the general rise in costs across industries, if you’re a homeowner who needs to access significant sums of money on short notice, don’t forget that you’re living inside a tremendous financial asset.